Rising wages in Asia and increased fuel costs have led many U.S.-based companies to re-evaluate the pros and cons of outsourcing to Asia. An article in Inbound Logistics magazine explains it as follows: “Once far-flung supply chains are contracting. U.S. manufacturers are bringing production back—not necessarily all the way back to the United States, but to the Americas.” This process is known as “nearshoring.”

Countries in the Western Hemisphere now offer attractive alternatives to Asian outsourcing destinations. In the past decade, many U.S. firms have built manufacturing facilities in Mexico. More recently, IT businesses are also moving parts of their operations south of the border. In addition to Mexico, Central and South American countries like Costa Rica and Chile offer significant benefits for U.S.-based companies that want to outsource. Besides their proximity to the U.S., Latin American firms are more familiar with Western business practices than their Asian counterparts, and are often only a time zone or two away from the companies they’re working for.

The following countries are some of the emerging outsourcing leaders in Latin American:

Mexico
Mexico has already attracted a number of North American firms, and its location is obviously one of its major benefits. “Mexico has the advantage of being in close proximity to the U.S., allowing American companies to conveniently outsource their software processes to Mexican enterprises,” according to SourcingLine, a resource for top IT firms. For manufacturing companies that need to physically move product, multiple transportation and distribution methods are available at a much lower cost than from Asia. Mexico comes in at #22 on SourcingLine’s ranking of the top outsourcing countries in the world.

The North America Free Trade Agreement (NAFTA) offers many advantages to firms doing business in Mexico. Even the AFL-CIO states that NAFTA, “ ... Made outsourcing to Mexico much more attractive for U.S. companies.” Labor costs are lower than in the U.S., and according to a survey by Alix Partners, “Though security risks are a clear concern among respondents, relatively few have actually experienced supply chain disruption in Mexico. Moreover, executives appear moderately optimistic about the future of the country’s security problems; 50% expect at least modest improvement in safety and security issues.”

Costa Rica
Besides being in the same time zone as the central U.S., Costa Rica is a member of CAFTA, a bi-lateral agreement that expanded NAFTA to five Central American countries. Costa Rica has been a conflict-free democracy since 1949 and many professionals speak English. The Costa Rican-American Chamber of Commerce says that, “Over the last thirty years, Costa Rica has become an attractive country for foreign investment due to its stable government and educated population. The country has transitioned from an agricultural economy centered around bananas and coffee to more advanced sectors, attracting world-class companies such as IBM, P & G, Hewlett-Packard and Intel.”

Small-to-medium-sized businesses are enjoying the benefits of operating in Costa Rica, too. An article in Bloomberg Businessweek, entitled “Costa Rica: Cultural Similarities Make It An Outsourcing Favorite,” describes the experiences of Brian Stafford, president of a California-based software company. Stafford looked at various options in Europe and Asia before choosing to outsource his $4 million company to Costa Rica. He says: “Costa Rica wasn't even on our radar. But they've been very easy to work with, and this allows us to get products to market much quicker." SourcingLine ranks Costa Rica #21 in its list of top outsourcing countries.

Chile
Though it may not be one of the first countries that comes to mind when someone mentions outsourcing, Chile is #11 on SourcingLine’s list. One benefit the country offers is its generous immigration policy. “In Chile, immigration rules are strikingly different than nearby nations like Brazil,” says Narayan Ammachchi, news editor for Nearshore Americas. “And IT companies can bring in as many skilled professionals from overseas countries as they want. Jobseekers from across the world are arriving by thousands and filling up the vacant positions in all sectors of the economy.”

Chile has also created educational initiatives to help meet the demand for greater numbers of well-prepared workers. “After we came the conclusion we were short, especially on ITO workers, we launched a campaign in 2009 called ‘Tu Naciste Para Ser Grande’ or ‘You Were Born to do Something Big,’” remarked Gordana Stojkovic, a Chilean investment promotion executive interviewed by Nearshore America. “(This) not only targeted massive educational institutions, but also the students themselves.” In an article by Jon Tonti, Stojkovic describes how English language programs, technical learning centers, and professional institutes work together to create well-trained graduates who are ready to meet the needs of local and international employers.

When most people hear the word outsourcing, they usually think of a factory somewhere in China, India, or Southeast Asia. Latin American countries, however, are working hard to change that stereotype. They want U.S. companies to realize that excellent outsourcing opportunities exist much closer to home.

About ten years ago, labor costs in developing nations were low enough that business owners outsourced many of America’s manufacturing jobs to countries like China, India, and Mexico, to name a few. The Center for American Progress quotes a U.S. Department of Commerce statistic that in the 2000s, “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” A significant number of domestic jobs moved to countries with lower labor costs.

However, the economic circumstances of these countries have changed dramatically in the intervening years. Labor costs in China have risen to record highs. Some manufacturers have found that issues with quality control and the inability to quickly implement product design changes have left them lagging behind. Earlier this year, Zacks Equity Research stated the following: “One survey by the Boston Consulting Group (showed) that 37% of large American employers were contemplating transfer of manufacturing from China to the U.S.” Why are some companies, from large multinationals to small businesses, moving operations back home?

Increased overseas labor costs are one significant factor. Earlier this year, CNBC quoted Steve Maurer, managing director of AlixPartners, as saying, "The Chinese manufacturing cost advantage has eroded dramatically in the last few years. If you go back to 2005, it was pretty common for landed cost from China to be 25 to 30 percent less than the cost of manufacturing in the United States. Based on our analysis, two-thirds of that gap has closed." Maurer continued, “If trends continue, the China cost is going to be on par with U.S. cost in the next four to five years.” As labor savings from overseas production decrease, firms are unwilling to tolerate the other undesirable effects of manufacturing outside the country.

The cost and logistical issues involved in transporting goods from overseas production facilities to the U.S. are also giving business owners pause. As energy prices in the U.S. decrease (due to newer technologies and increased domestic oil production), U.S.-based firms can realize extensive cost savings by manufacturing their good closer to home, even if labor costs are somewhat higher. Also, political stability and established transportation infrastructure ensure that supply and distribution channels function more efficiently.

Having production facilities overseas requires significant oversight in order to maintain quality control. Some companies have discovered that in addition to decreased quality of existing product designs, the ability to quickly implement changes and innovations is hampered by distance, language difficulties, and the lack of highly skilled laborers. An article in The Economist describes the experiences of ET Water Systems, a start-up from California that builds irrigation devices for businesses. Along with many other firms, ET Water Systems moved their manufacturing operations overseas in 2005. Over the next five years, however, “ … Innovation suffered from the distance between manufacturing and design, and quality became a problem, too.” CEO Mark Coopersmith then re-evaluated the differences between domestic and overseas production. “(Coopersmith) was amazed to find that California was only about 10% more expensive than China. And that was just on the immediate numbers, without allowing for the intangible benefits of making the devices almost next door.” Once ET Water Systems moved production back to California, the ability to directly supervise production saved both time and money.

Putting a “Made in the U.S.A” label on consumer goods can also lead to increased sales. Apparel company Karen Kane moved most of its production back to the U.S. after dealing with quality issues, long lead times, and delays for shipments. Besides alleviating these problems, the company noticed that, “Last year, Karen Kane dresses, blouses and jackets promoted with Made-in-USA posters at Dillard's department store posted 15% higher sales than similar non-promoted clothing” (USA Today, July 5, 2013). Many consumers prefer to purchase goods produced in America, and some are even willing to pay more for them.

As the world economy changes and workers in developing nations demand higher pay and more benefits, and as economic conditions improve domestically, more and more companies will consider moving their manufacturing operations back to the U.S. In fact, according to the Denver Business Journal, “While reshoring has accounted for only about 50,000 jobs returning to U.S. soil since 2009, that represents about 10 percent of all new manufacturing jobs created in the last three years. Experts predict the rate of reshoring to increase substantially in the next 10 years.”

The decision whether to outsource or onshore (“re-shore”) your manufacturing operations is a complex one. Executives have to evaluate not just the labor costs of various areas, but also what the decision will mean as far as quality control, logistics, and public opinion are concerned.

“A few years ago, manufacturers were tripping over themselves to outsource to China,” says Ian Benoliel from NumberCruncher, makers of All Orders inventory software. “Not so much anymore, as unit costs are steadily rising due to the price of oil and workers’ demands for higher wages and more benefits.” Benoliel continues, “Engineering has also been a nightmare, where any change in design causes major production delays. Customer service has also been impacted due to increases in delivery time.” While no two companies face all of the same challenges, there are some common considerations for every firm that goes through this process.

Wherever you choose to establish your production facilities, shipping methods and costs need to be considered, along with how to ensure that only quality products leave your factory. Also, the political and economic stability of an area can directly affect your bottom line. Even if wages are significantly lower, risks to your supply chain and operational stability may make some locations far more desirable than others. It’s critical to do your homework and analyze all possible issues that can arise in a particular country or region before basing operations there, regardless of how enticing that location may seem based solely on labor costs. Some of the major considerations include:

Shipping

In an article about outsourcing in The Economist earlier this year, the author states that, “… Companies are increasingly factoring in the rising cost of shipping goods across oceans, and the risk that natural disasters or geopolitical shocks could cut off essential supplies.” How much will shipping add to your production costs? Does established transportation infrastructure exist in your desired location? If not, how much will you have to invest to build the necessary channels to receive supplies and distribute finished goods?

Quality control

In order to realize the gains offered by lower wages, good quality control has to in place at the source of manufacturing. How can you ensure that the goods produced in your factory meet company quality standards? What kind of oversight is provided at the manufacturing facility, and by whom?

Skill level of the labor force

Certain areas of the world have a greater percentage of highly trained laborers. Does the area offer a well-educated work force? How technical are your products? Do nearby vocational or technical schools work with companies to provide skilled laborers for specific needs? Are there enough workers available to fully staff your manufacturing facility?

Political and economic stability

Can you reasonably expect your supply chain and distribution channels to operate uninterrupted by political or economic events? What is the government’s attitude toward overseas companies who do business in their area? For example, North Korea’s refusal to allow workers to return to factories in the Kaesong Industrial Region (which is jointly operated with South Korea) has caused close to a billion dollars in losses so far.

Incentives

Many areas, both in the U.S. and worldwide, offer incentives to attract new businesses. After President Obama’s 2012 “State of the Union” address, the New York Times reported that the President had, “ … Called for a wide-ranging package of policies to help create American manufacturing jobs, including trade enforcement measures, business tax breaks, and worker training programs.” What kinds of incentives are available for your particular firm or industry? Do tax benefits exist that can help offset labor costs?

Public perception

For your customer, how important is the location where the product is made? To some, having a “Made in the USA” sticker can determine whether or not they purchase a particular item. Others simply want the best possible quality product at the lowest possible price, regardless of the product’s origin. If you know your customer base well, you’ll know how much of a factor this is for your clients. Many consumers, especially after the Rana Plaza tragedy, are concerned about conditions in overseas factories and make buying decisions accordingly. What will the working conditions in your factory be like? Are employees paid a living wage based on the local economy? Does the facility meet basic standards of safety and health?

While not an exhaustive list, these are some of the basic factors that must be evaluated before making a decision to move your manufacturing overseas or to bring it back to the U.S. Each company will weigh these factors differently to meet the unique considerations of their organization, their products, their employees, and their customers. After a thorough analysis, you’ll know which choice is right for you.